Similar Images feature emerges from Google Labs
I tested out similar images on some easy stuff (umbrellas) and some tougher stuff (celebrities), and found that it worked really well. Similar Images is good at matching backgrounds, and even manages to find similarly-posed photos if you're searching for an animal or a person. It obviously doesn't do as well when the subject is obscure or abstract, or there aren't a lot of photos of it in the database. In cases like that, it'll be more likely to match your image's color scheme than to find a picture of the same person or thing.
Similar Images isn't made to find identical images hosted on different sites. If you're trying to determine where an image came from, try putting it into TinEye instead.